The Industrial and Commercial Bank of China's (ICBC) simultaneous listings on the Hong Kong and Shanghai stock exchanges in mid-October marked a new stage in the reform of the country's four State-owned banks.

Before the ICBC, two of the "big four" State-owned commercial banks, China Construction Bank (CCB) and Bank of China (BOC), had already gone public. The fourth, Agricultural Bank of China, will by now have gained adequate insight from the experiences of its peers if it goes public in the future.

After their initial public offerings (IPOs), the State-owned banks will see remarkable changes in their functions, their business models and even their roles in the country's economic development.

Before the State-owned banks can get on with their new roles, they will face a series of problems, such as the salaries of high-ranking managers after they go public, their roles in the government's macroeconomic re-adjustment, and the problem of overheated investment driven by the loans boom.

So what exactly is the function and role of these State-owned banks after they go public?

Before the four State-owned banks began their reforms to qualify for an IPO in 2003, their role was to pool financial resources across society and allocate them to industries, sectors or enterprises.

In both actions, they had to abide by government guidelines and fulfil their roles in helping to re-adjust the economy.

At the end of 2003, the State-owned banks began a financial restructure according to internationally accepted financial standards.

To prepare for a market-oriented commercialization, to qualify for an IPO and attract potential strategic investors, the State-owned banks reined in credit, cut down non-performing loans and increased capital.

But they are still the major power in the country's economy and sit at the core of the economic cycle.

The real estate industry has driven the latest round of economic growth. Investment in the sector and individual house purchases have increased dramatically in a short period.

The State-owned banks are behind this growth because of their huge market share in individual house mortgages and long-term ties with property developers.

The business operations of the State-owned banks have a direct influence on the ups and downs of the country's banking credit as a whole.

When the four State-owned banks retreated from rural areas in an attempt to improve their business performance, shutting down branches in small towns and remote counties, local financial markets slumped as the big cities amassed more financial resources.

One of the important tasks in the financial restructure of the State-owned banks was to forge more prudent policies about granting loans and to conduct stricter surveillance on existing loans.

Therefore, loans granted by the four State-owned banks witnessed a slight decrease in 2004 and 2005, while other commercial banks snatched bigger market shares in 2005.

This situation changed when BOC, CCB and the ICBC finished their financial restructuring and went public, one after the other.

In the first three months of the year, the country's banks loaned 1.26 trillion yuan (US$155 billion) more than half the expected bank loans for the year, 2.5 trillion yuan (US$309 billion). A large proportion of the loans were made by the four State-owned banks.

This drastic turnaround in credit policy by the State-owned banks originates primarily from the huge difference between their deposits and loans, which represents massive debt for the banks unless it's used appropriately to make profit.

But more importantly, this U-turn in their business strategies stems from the changing functions of the State-owned banks.

As public companies, the State-owned banks have to earn more profit for shareholders while maintaining the value of the State-owned assets that were under their management before the IPO.

With profit the chief target, the State-owned banks must increase loans, revenue from which is the major source of profit for domestic banks.

The State-owned banks are following their own business logic as shareholding companies, despite the central bank's attempts to tighten control over bank loans through guidance and issuing earmarked notes both non-punitive means to guide commercial banks.

On the one hand, they now have the same business goals as other commercial banks liquidity, security and profitability. They put more money into bank loans or the inter-bank lending market for profit.

On the other hand, the State-owned banks will probably no longer play the same role supporting the country's financial sector and supplying public goods in the financial field.

It is expected that changes will take place in the business operations of the State-owned banks after they float on the capital market.

These changes will decide their performance in the future and the overall economic development trend. A close watch on the State-owned banks is indispensable to judge the economic situation of China.

Source: China Daily